Key Points:
- Gold prices fell due to rising inflation concerns after US-Iran talks failed and a Strait of Hormuz blockade.
- The blockade and increased energy prices heighten inflation risks, potentially delaying interest rate cuts.
- Gold, a non-yielding asset, typically suffers from higher interest rates.
- Despite geopolitical support, gold faces macroeconomic headwinds and liquidity challenges.
Gold prices edged down amid growing concerns about inflation after peace talks between the US and Iran failed. Washington’s plan to blockade the Strait of Hormuz deepened a global energy-supply crisis, further impacting markets.
Bullion fell by as much as 2.2%, trading below $4,650 an ounce, before recovering some of its losses. The US military announced it would begin the blockade at 10 a.m. Eastern Time. This decision came after weekend negotiations with Iran failed to turn a fragile ceasefire into lasting peace following six weeks of conflict in the Middle East.
The sharp rise in energy prices since the conflict began has increased the risk of inflation. This makes it more likely that central banks will delay cutting interest rates or even raise them. This situation is bad for non-yielding gold, which usually benefits from lower borrowing costs. Stocks fell and the dollar strengthened by 0.3% on Monday, also working against gold, which is priced in the US currency.
Oil and natural gas prices surged. President Donald Trump also stated that the US would stop any vessel that paid a toll to Iran for safe passage through Hormuz, the crucial maritime choke point that connects the Persian Gulf to global markets. Before the war, a fifth of the world’s crude oil and liquefied natural gas passed through this strait.
“Events over the weekend clearly put the fragile ceasefire at risk and likely prolong the conflict,” said Paras Gupta, head of discretionary portfolio management in Asia at Union Bancaire Privée. However, he added that price movements in gold were “less exaggerated” than earlier in the war. The Swiss private bank is gradually adding gold back into client portfolios after reducing its exposure from about 10% to 3%.
In an early look at how the war is affecting the US economy, March inflation climbed by the most in nearly four years. A record increase in gasoline prices was responsible for almost three-quarters of this monthly rise, according to data released Friday by the Bureau of Labor Statistics.
“Elevated inflation expectations continue to complicate the outlook for Federal Reserve policy, reinforcing a higher-for-longer rate environment,” Manav Modi, an analyst at Motilal Oswal Financial Services Ltd., noted. “Gold remains caught between geopolitical support and macroeconomic headwinds,” he said.
Gold has fallen about 10% since the conflict began at the end of February. A shortage of available money in the early weeks forced investors to sell the metal to cover losses elsewhere. More recently, gold has recovered some losses as a growing focus on slowing economic growth balanced out the risk of higher interest rates.
